CC-BY-SA-2.0, FlickrSasha Evers, courtesy photo. Sasha Evers Will Lead the Latin America and Spanish Business of BNY Mellon
BNY Mellon Investment Management (BNY Mellon IM), the world’s largest multi-boutique asset manager with 1.7 trillion dollars in assets under management, announced that Sasha Evers, Managing Director for Iberia, expands his role to lead the Latin America business.
Antonio Salvador Nasur will continue in his regional role based in Santiago, Chile, reporting directly to Sasha Evers, based in Madrid, Spain.
Under Evers’ leadership BNY Mellon IM opened its Madrid office in 2000 to successfully grow BNY Mellon IM’s presence across Iberia (Spain, Portugal and Andorra), where current assets under management are USD 3,537 bn (EUR: 3.730 m).
Sasha Evers, Managing Director of BNY Mellon IM for Iberia, said: “The Latin American region offers a strong long-term growth story for our business. I am looking forward to working closely with Antonio to further build upon our business in the region.”
Matt Oomen, Head of International Distribution at BNY Mellon Investment Management, commented: “While setting in stone our longer term distribution strategy to grow assets in Latin America, we saw many synergies between Iberia and Latin America. Sasha’s experience and leadership puts him in the best position to further grow our presence in the region, following his success leading BNY Mellon IM Iberia.”
Nicolas Walewski, who heads Alken, has been in Madrid recently. Courtesy photo.. “It’s Dangerous to Be Negative in Banks: We See Conditions for Greater Growth and Margins in Europe”
Everyone is aware that last year was a complicated one for the funds of Alken, Nicolas Walewski’s fund management company. His compliance and convictions for the cyclical sectors took their toll due to events such as Brexit, which penalized his funds. But the market has been turning around for months, and in 2017 things have begun to unfold differently: “Taking panic and redemptions in European equities into account, 2016 was a year for buying,” Walewski said recently during a presentation with clients in Madrid.
The fund manager considers that, after three years of “destocking” in companies, this year begins a new “restocking” cycle, in which firms begin to invest again… and Walewski points to these new investments, to the recovery of industrial activity, and to the fact that many industries are boosting their pricing power -in addition to the fact that American and Asian investors have returned to the European market only very marginally- as positive indicators for European Equities. “Companies have invested little, overall, there are no excesses globally, so there is no reason to be pessimistic,” he says.
On the contrary, there are numerous indicators giving him the go ahead for buying equity and selling fixed income and shares with a behavior similar to bonds. “We’ve seen years of better behavior in bond-like securities while cyclicals lagged behind,” he recalls, but the story will change. In fact, this rotation from the defensive to the cyclicals is already occurring in the markets and he advises: those investors who are underweight or negative in sectors such as banking will be motivated to rotate their portfolios.
“Value will offer better returns as rates rise,” he says, “with the higher rates, the 10-year profits will be reduced, so that the growth style will offer lower returns” and lose its appeal.
In fact, this story is now rewarding the fund manager’s loyalty to the cyclical sectors, which weighed negatively last year. Walewski is still strongly committed to them this year.
Opportunity in banks
Among these sectors, and although Alken European Opportunities is still underweight in the financial sector (it underweighs the insurance sector), the fund manager points out the opportunity in banks. Thus, in the face of recent negative factors such as regulation, higher capital requirements and QE policies (“good for the cycle but terrible for banks”), the fund manager now sees positive factors, such as Real Estate price recovery (the main liability of banks), the deleveraging of individuals and companies (which allows capital reinforcement), or greater clarity in the Italian banking system. “We see conditions for higher growth and higher margins of banks in Europe, which is positive for shareholders,” says the fund manager. Although there are still many entities that are not to his liking (which is why they have not yet overweighed the sector), Walewski considers that it is “dangerous to be negative in banks”.
Cyclical sectors
One of the sectors to which he continues to be strongly committed is discretionary consumption (with an overweight of more than 22% in Alken European Opportunities), especially because of his conviction in the automotive sector, where he is beginning to see greater investments and anticipates a strong rally. He likes names such as Peugeot or Renault: the fund manager considers the latter as “the Ryanair of the automotive market”, due to its attractive low cost offer to which investors have not put a price and taking into account the great business opportunity currently opening in this business segment. As a matter of fact, Ryanair is another one of his big commitments, due to its price, to its strong growth in Germany and to the improvement of its cost structure. He also likes the luxury sector, which has been recovering in recent months (fuelled by demand stabilization in China) and whose rally will continue, he says. He is also committed to Wirecard, or B & M Value Retail, which he considers to be one of the best operators in the British retail market and which has been severely damaged by Brexit, but which could be revalued by up to 25%.
In its European stock fund, the fund manager also overweighs the industrial sector, where he sees greater business volumes and increasing power to establish prices. He speaks of Leonardo, an Italian defense company -and a case of restructuring- as a good investment in an environment of strong demand for the sector, which could boost its price up to 30%.
Healso overweighs Information Technology and the materials sector, and points out the opportunity at Glencore. “There is great skepticism about this sector, but it was the best last year and it will benefit from a more positive framework in the relationship between supply and demand.” He is cautious in energy but has increased the weight somewhat, although he admits that it is a sector that requires being very selective. Within this sector, he is still committed to renewable energy, a structural tendency “in spite of Trump”. Among his main underweights are telecommunications, health, utilities, or basic consumption sectors.
Due in part to the fact that many bond-like securities are in the large-cap segment, this year the fund manager glimpses opportunities in small caps. Last July, the management company opened its fund that invests in small capitalization firms, which had been closed to new subscriptions since 2013.
Alken, which admits to two management mistakes in recent times: the investment in Monte dei Paschi (“with the added lesson of not trusting an Italian banker”), and the fact of not seeing the “destocking” in 2015, currently has 4.5 billion Euros in assets under management.
The political impact
On the risks posed by politics this year, Walewski is cautious: in Europe, he sees evidence that much of the risk has already been accounted for with the strong capital outflows last year. “It takes a lot for this risk to prevail over fundamentals: banks are improving, valuations are cheap, industrial firms are improving their pricing power… it takes a lot,” he says. In fact, he believes that the truly important elections will be the French ones, because the risk is the lack of integration in the Union: “The risk is the lack of solidarity in Europe. Apart from the ECB, there is not much integration,” he says, and he believes the French stance toward more federalism, or its rejection, is the key.
As regards Brexit, which last year provided a buying opportunity for British domestic companies, he believes that “everything is negotiable” –you only need to see the Swiss case, he says, in which some sectors enjoy more protectionism, while others enjoy greater openness– and that it will take years. “The deadline for triggering Article 50 is artificial,” he adds. Although there may be more volatility, he believes that some of the impact is already accounted for. He is also cautious about Trump and explains that the reaction of the markets will depend on their measures. Of course, he believes that over time it could lead to some disappointments, but he does not see it as an immediate threat to the markets.
Finally, while recognizing that China will limit its growth, he points out that the debt is in public hands, rather than in private, which limits the problems, so he does not consider that to be an immediate threat.
Pixabay CC0 Public DomainFoto: 495756. Annika Falkengren and Denis Pittet, New Managing Partners at Lombard Odier
The Lombard Odier Group announces the appointment of Annika Falkengren and Denis Pittet as new Managing Partners.
“These two nominations provide a solid base for the further build-up of the Lombard Odier Group” said Patrick Odier, Senior Managing Partner of the Lombard Odier Group. “We are particularly pleased to welcome two highly complementary personalities with Annika Falkengren, who brings a recognised expertise in the running of a respected and successful European financial institution, and Denis Pittet, who has contributed significantly to the strategic development of the bank over the past 20 years. These two appointments represent a strong endorsement of our strategy, differentiated business model and long term vision.”
Annika Falkengren, currently President and CEO of Skandinaviska Enskilda Banken (SEB), will join the Lombard Odier Group in July 2017 as a Managing Partner based in Geneva. Annika Falkengren joined SEB in 1987 and made a long and distinguished career which culminated in her nomination as President and CEO of SEB in 2005. Recognised as one of Europe’s most respected bankers, she is also Chairman of the Swedish Bankers Association.
“I am very honoured to join a Group with strong family values and with a truly international mindset and outlook”, said Annika Falkengren. “I firmly believe in the partnership model which has been underpinning Lombard Odier’s evolution over the 221 years of its history.”
Denis Pittet will become a Managing Partner in January 2017. Denis Pittet joined the Group in 1993 as a trained lawyer. He was Group Legal Counsel, before joining the Private Clients Unit in 2015 where he took over the responsibility for the independent asset managers’ department and led the expansion of wealth planning services in the areas of family governance and philanthropy. He became a Group Limited Partner in 2007. He is also Chairman of the Fondation Philanthropia, an umbrella foundation supporting clients’ long-term philanthropic projects.
“My objective will be to maintain a first class client experience at Lombard Odier”, added Denis Pittet. “We are solely dedicated to clients in a model which puts independence at the heart of everything we do.”
After 20 years of commitment to the Group, Managing Partner Anne-Marie de Weck retired on 31 December 2016. She joined Lombard Odier in 1997 to take over responsibility for the Firm’s legal department, and subsequently its Private Clients activity. A Managing Partner since 2002, Anne-Marie de Weck has made decisive contributions to the strategic development of the firm’s private client business.
“We would like to express our sincere thanks to Anne-Marie de Weck for her relentless commitment to serving our clients. We are also very grateful that she will maintain a close relationship with the Group as a member of the Board of Directors of our Swiss-based bank. In this role, she will continue to be involved in defining the strategic orientation and overseeing the operational activities of the business”, said Patrick Odier.
In July 2017, the Management Partnership of the Lombard Odier Group will be composed of Patrick Odier (Senior Partner), Christophe Hentsch, Hubert Keller, Frédéric Rochat, Hugo Bänziger, Denis Pittet and Annika Falkengren.
Photo: Investment Europe. Invesco Fixed Income Appoints Emea Chief Investment Officer
Invesco today announced the appointment of Gareth Isaac as Chief Investment Officer, EMEA for Invesco Fixed Income (IFI). Gareth reports to Rob Waldner, Chief Strategist and Head of the Multi-Sector team for Invesco Fixed Income.
This is a newly created role and a significant hire to support the growth of IFI globally and in the EMEA region in particular. As EMEA CIO, Gareth will lead the portfolio management and strategic investment thinking of the Global Macro team in London and represent the EMEA region on the IFI lnvestment Strategy Team (IST). Gareth will support Nick Tolchard, IFI’s Head of EMEA, to drive growth of the IFI business in the EMEA region. He will also work closely with the Investment Grade Credit, High Yield, Emerging Markets and Credit analyst teams to contribute to product development in these areas.
Gareth, who is based in London, joins from Schroders Investment Management, where he was a Senior Fixed Income Fund Manager for five years, with responsibility for portfolio management, investment strategy and client and consultant relationships. His experience in managing fixed income investments spans nearly 20 years, with previous roles at GLG Partners, SG Asset Management, Newton Investment Management and AXA Investment Management.
Nick Tolchard, Head of EMEA for Invesco Fixed Income, commented: “Gareth’s credentials in developing and delivering strong investment strategies and his depth of experience in fixed income markets make him the ideal candidate for this role. He is known in the investor and consultant industry as a highly credible and respected investment strategist and we look forward to working together to deliver a superior investment experience for our clients globally.”
Pixabay CC0 Public DomainPhoto: bykst. Credit Suisse: Conflicts of Generations Sets Tone for 2017
In its recently published annual Investment Outlook, Credit Suisse’s investment experts suggest that financial markets are likely to remain challenging in 2017. The central economic forecast is for global GDP growth to accelerate slightly next year from 3.1% to 3.4%, albeit with pronounced regional differences. In combination with a slight rise in inflation and some monetary tightening, most asset classes are expected to generate low returns in 2017.
Fundamental economic and social tensions – summarized using the term ‘Conflicts of Generations’ – provide an uncertain backdrop for investors. Michael Strobaek, Global Chief Investment Officer at Credit Suisse, predicts: “The investment environment remains difficult and political events are again likely to trigger some turbulence in 2017. However, market corrections are likely to offer selected opportunities that investors should seize”.
Global economic forecast
Global growth should improve somewhat in 2017, albeit with significant differences between countries and regions. On the whole, investors can expect a slight recovery in corporate investment coupled with still robust consumer demand, but overall growth is likely to remain well below pre-crisis levels. US fiscal easing would support the cyclical upswing, while uncertainty over global trade could act as a restraint.
Inflation is likely to pick up but should remain well below central bank targets in many developed economies except for the USA. While the US Federal Reserve will likely continue its gradual normalization of interest rates, other central banks will probably maintain a more accommodative stance, while shifting away from mechanical balance sheet expansion.
Oliver Adler, Head of Economic Research at Credit Suisse says: “Political uncertainty and risks look set to remain in the spotlight, as Brexit negotiations are initiated, elections are on the agenda in core European countries and the foreign, security and trade policies of the new US Administration take shape”.
Credit Suisse’s investment experts see European risk assets (credits and equities) as particularly exposed to an increase in political risks.
Global market outlook
Rising yields and steepening yield curves are beneficial for financial sector profitability. European political events are a source of potential volatility for European institutions, but US financials (including junior subordinated debt) are still favored as a source of return. The Trump administration is likely to favor less rather than more regulation in the financial sector. Emerging market (EM) hard currency bonds are attractive due to their yield and diversification potential. After the strong rally in EM bonds in 2016, country and sector selection will, however, be a key determinant of returns in the year ahead.
Among equities, investors should favor the healthcare and technology sectors in view of their sound fundamentals. Healthcare offers some of the strongest earnings trends. Technology, meanwhile, is still growing strongly in areas such as cybersecurity, robotics and virtual reality. Both sectors also have the most to gain from a likely US repatriation tax break.
Credit Suisse’s investment experts also favor selected infrastructure-oriented stocks, notably construction and construction-exposed industrials. In combination, the increased political will for fiscal expansion and a growing need to renew infrastructure will provide significant stimulus in several large economies in the coming years, including in the USA. The US dollar is expected to gain ground in view of rising US interest rates, fiscal expansion and a potential repatriation of deferred US corporate taxes. While the euro may suffer from a focus on political risks in 2017, the Japanese yen should recover from undervalued levels.
Nannette Hechler Fayd’herbe, Global Head of Investment Strategy at Credit Suisse, says: “The biggest challenge investors face in 2017 is to find yield at reasonable risk. We consider emerging market bonds to be the most attractive but selectivity as regards issuer risk remains key.”
Switzerland
For Switzerland, Credit Suisse’s investment experts expect continued moderate growth with an ongoing recovery in exports and subdued domestic demand. While inflation should remain below target, deflation risks have subsided.
The Swiss franc is, however, likely to weaken versus a generally stronger US dollar. Credit Suisse currency experts believe that any depreciation of the Swiss franc against the euro is likely to very limited, given that interest rates will remain low in the Eurozone and also due to lingering political risks in Europe.
Anja Hochberg, Chief Investment Officer Switzerland at Credit Suisse, says: “We recommend to add broadly diversified emerging market bonds to the portfolio and favor Swiss equities over Swiss bonds, with a preference for pharma and IT shares. For investors that can bear some illiquidity, private equity continues to be an interesting asset class.”
Europe & EMEA
Uncertainties over Brexit, political risks and intermittent worries over the health of European banks are likely to create bouts of volatility in European risk assets, making risk-adjusted returns on equities less attractive.
However, Credit Suisse’s economists believe that Brexit is unlikely to trigger exits by other EU members. Hence, peripheral sovereign and bank bonds should hold up well. Risks in Italy and Portugal need to be closely monitored, however.
The Eurozone should see modest growth. However, the divergence between a slightly tighter Fed and a still very accommodative European Central Bank mean the euro is unlikely to make gains against the US dollar. The British pound should stabilize after its drop below fair value in 2016.
Michael O’Sullivan, Chief Investment Officer International Wealth Management at Credit Suisse, explains: “What is certain even at this stage is that Brexit will visit economic and political uncertainty not just upon the UK itself but also upon its European neighbors.”
Asia Pacific
Asia can look forward to stable growth in 2017, underpinned by a structural transition from manufactured exports to services-based consumption.
China remains on course for a soft landing, as the government successfully manages a bifurcated economy in which the industrial trade sector continues to decelerate while domestic services expand steadily. In this context, the real estate sector must be prevented from overheating in tier 1 cities.
A supportive combination of firming economic growth, reasonable valuations and improving profitability suggests that emerging Asian equities should perform well in 2017, possibly outperforming their global emerging markets counterparts.
John Woods, Chief Investment Officer Asia Pacific at Credit Suisse, notes: “Our more favorable view on Asia reflects our improving view on China, where we believe the domestic economy – particularly the services sector – should surprise to the upside.”
Foto: Unsplash, Flickr, Creative Commons. Project Bonds, la palanca que transformará el mundo
5 new investors, for a combined EUR 147m, have joined the BRIDGE platform -a platform with funds that invest in debt related with infraestructures owned by Edmond the Rothschild AM- through BRIDGE II, a Luxembourg-regulated fund launched at the end of March 2016. Less than 2 years after its first closing, the BRIDGE platform has raised close to EUR 1bn through 3 funds, of which EUR 400m in 2016.
Persistently strong institutional demand
The first closing of BRIDGE II at the beginning of December involved new investors based in Italy, Germany and France and should enable an interim closing at the beginning of 2017 as investors are currently at an advanced due diligence stage. BRIDGE II is expected to complete its fundraising in the course of Q2 2017 and for a similar amount as FCT BRIDGE I (BRIDGE I).
“For institutions looking for yield in today’s low interest rates environment and amid ongoing banking disintermediation, high asset quality along with low volatility and stable cash flows over long maturities represent very solid fundamentals”.
As with BRIDGE I, this second generation fund, which is managed by the same London-based team of 11 experts, seeks to broaden the platform’s range and capture new opportunities among the vast universe of available infrastructure assets.
At the end of 2016, The BRIDGE platform comprises three funds representing an aggregate amount of close to EUR 1bn under management.
Strong momentum in commitments
The commitments from BRIDGE II’s initial investors also mark the beginning of the fund’s investment period. Three investments have already been structured and closed just before the Christmas break.
These first crystallised opportunities see the BRIDGE platform reinforce its position in the social and telecoms infrastructure, the latter via a first investment in a fibre optic PPP (Public Private Partnership) in France. A new opportunity in the renewable energy sector is being structured and should close soon, confirming BRIDGE’s focus on this sector.
In a very active year for the platform, these newly closed opportunities take the number of investments in 2016 to 10. BRIDGE I, 94% invested, is also finalising its investment period -one year ahead of schedule-.
The investment team’s strong relations with sponsors give it access to a wealth of diversified opportunities and enable it to act as lead arranger in major infrastructure projects financings.As the team investsonlyon behalf of its clients, this allows it to select high-quality assets with attractive credit margins and maximise investor protection in line with investment mandates.
Both fund vintages can act in concert through co-investments to access opportunities requiring significant investment capacity.
Photo: LinkedIn. Jimmy Ly Will Join Robeco in Miami as Head of Sales US Offshore & Latin America
Jimmy Ly, part of Pioneer Investment’s sales team in Miami, will join Robeco on January 17th. Funds Society has learned that Ly will join Robeco’s Miami office as Executive Director heading the Americas Sales Team (US Offshore and Latin America). Ly will succeed Joel Peña, who recently left the company.
According to Robeco, Jimmy Ly will be join Robeco as new head of Sales US Offshore & Latin America reporting to Javier García de Vinuesa. He will be responsible for maintaining, developing and expanding existing relationships with Robeco’s current client base and the main players in the America’s offshore region, and for acquiring and developing relationships with new clients which lead to new business opportunities.
Jimmy will continue working at Pioneer Investments until January 13th to help with the transition process to the rest of the team.
Jimmy started his career in 1998 as Mutual Funds Relationship & Product Manager at Merril Lynch in New York. He relocated to Singapore to manage and accelerate Merril Lynch´s mutual fund sales and marketing business in Asia.
In 2002 he joined Pioneer Investments as Regional Sales Manager in Los Angeles and Miami. During his last two years at Pioneer Investments he was Senior Sales Manager.
Jimmy holds and MBA International Marketing from Loyola Marymount Univesity Los Angeles and a Bachelor of Arts from the California State University in Northridge.
CC-BY-SA-2.0, FlickrPhoto: DD. The Road to Retirement is as Important as the Destination
If you use the GPS map application Waze then you know that there are usually multiple routes to a destination, and that each could provide an experience remarkably different than the others. You could follow the easiest route and make it to your location on time and without stress, but you could also get stuck in heavy traffic, because you choose “shortest route” on the app instead of “fastest route.” Or, seeking to save time, you could choose the fastest route but find yourself in a confusing maze of one-way side streets littered with potholes.
Employees participating in defined contribution retirement plans also take different routes to a common destination — retirement — and have different investment experiences along the way. A primary driver of a plan participant’s experiences is asset allocation, and the widespread adoption of target date and other default strategies used for that purpose is well documented. What is surprising, however, is that even with the proliferation of Target Date Funds (TDFs), more than three- quarters of retirement plan assets are still invested in individual core menu options, as shown below in Exhibit 1.
This has motivated some plan sponsors to enlist “white label” strategies for help. White label strategies contain one or more funds that are stripped of company and fund brands and replaced with generic asset class names or investment objectives such as “income” or “capital preservation,” among others. These solutions aim to improve core allocations (by making plan choices simpler), create more diversified portfolios and be more cost effective.
Aligning white label solutions with participant DNA
You can take a white label strategy a step further by aligning the type of investment experience the strategy will deliver with factors like participant perceptions of investing and plan demographics. In other words, you can build investment strategies that make the journey to retirement a bit more pleasant. The general characteristics, or “DNA,” of participant bases can vary greatly. Many DC plans, for example, have growing numbers of millennial workers (those born between 1980 and 2000) among their ranks. Having started their savings years with the bursting of the tech bubble followed by the global financial crisis, millennials tend to be conservative investors and concerned about losing money despite their long-term investment horizons. They have the same amount invested in cash and fixed income assets as older generations do. Plans with a significant millennial participant population should consider options that aim to limit losses in challenging market environments while still providing the growth opportunities critical for younger investors, given their long journey to retirement ahead.
By tailoring white label investment options to the characteristics and unique needs of a particular demographic or work force, the solutions can be optimized to deliver an investment experience that can drive better long-term outcomes for participants.
How can you determine what type of investment experience is most appropriate for a given population? Exhibit 2 provides some examples of factors plan sponsors can consider when evaluating the best approach for their plan. White label solutions incorporating these factors may help participants stay invested through various market conditions.
For most, there isn’t a perfect route to retirement. There are inevitable bumps and detours along the way. You can find ways to make the ride easier and less anxiety-provoking, however. Since plan demographics, behavioral beliefs and investment committee dynamics vary from plan to plan, these factors can play a role in determining the appropriate investment experience for a group of participants.
Demographic considerations such as age, employee turnover and the presence of a Defined Benefit (DB) plan are important drivers, while behavioral factors including loss aversion, engagement and professional profile are also important. Additionally, you should consider investment committee beliefs around expressing investment views and the role of a core menu. Taking all of these factors into consideration can help you optimize white label portfolios for your participants. While getting participants to their retirement destination is critically important, you can’t ignore the journey they will take to get there.
Kristen Colvin is a director of consultant relations at MFS Institutional Advisors, Inc., the institutional asset management subsidiary of MFS Investment Management® (MFS®).
CC-BY-SA-2.0, FlickrPhoto: Henry Jager. Three Main Concerns for EM in 2017: Potential Protectionist Trade Policies, Rising Rates and a Strengthening US Dollar
According to Goldman Sachs Asset Management, Donald J. Trump’s victory in the US election has fuelled three main concerns for Emerging Markets (EM): potential protectionist trade policies, rising rates and a strengthening US dollar. The surprising result created uncertainty for EM, which is reflected in equity market performance and flows since the election: the MSCI EM Index is down 5%, underperforming developed market equities by almost 7% and suffering the worst week of underperformance since the financial crisis. EM equity flows have also sharply reversed; outflows hit $7bn in the week following the election – equating to one third of YTD inflows.
The firm believes the initial market reaction is underappreciating the diversity of the EM opportunity set and the wide- ranging impacts of trade policy, rising US interest rates and a strengthening dollar on each of the 23 economies in EM. They also think investors may be overestimating the potential for campaign promises to become actual policy.
In their view, the long-term case for owning EM equities – portfolio diversification and alpha potential – remains intact.
The Possibility of Protectionism
EM has been the low-cost manufacturer to the world since the early 1990s. If the US introduces protectionist policies, most likely in the form of tariffs on imported goods, many EM economies could be negatively impacted. Crucially, the US may also experience sizeable repercussions. In fact, the introduction of tariffs – and resulting retaliatory measures from countries like China – could cause up to a -0.7% hit to US real GDP growth.
The firm is not convinced that tariffs would bring trading partners “to the negotiating table” – as is often cited using the example of Ronald Reagan’s 45% tariff on Japanese motorcycles in the 1980s – they would more likely result in trade wars and counter-protectionist acts. The Chinese government has already suggested that it is open to letting the country’s US dollar peg relax and is threatening to stop the import of key US products – actions that could further undermine growth in the US.
The firm could see aggressive government concessions for firms willing to keep manufacturing in the US and tariffs in specific industries where US manufacturing has suffered most. If the Trump administration is slightly more pragmatic than the market has assumed then investors may feel more assured that the EM growth model is still intact. They believe there could be a difference between campaign rhetoric around protectionism and actual implementation as policy makers may be constrained by economic realities such as negative consequences to US economic growth. The introduction of unilateral tariffs could have lasting negative consequences for the US and could undermine what has been widely considered part of President-elect Trump’s mandate: to improve the economic position of the US working class.
The Risk of Rising Rates
Since the election, inflation expectations and US government bond yields have increased. Rising US interest rates will mean higher funding costs for EM debt and increased pressure on EM economies. In addition, higher US rates and a waning search for yield could reduce foreign investment into EM, which has lowered funding costs and supported increased consumption and lending in EM economies. These are clearly headwinds for EM growth.
An end to the ‘low rates, low growth’ environment may not be as negative for EM as markets may be suggesting. If rising rates are the result of an improving growth backdrop in the US, it should be supportive for EM economies. Since 1980, EM equities have outperformed developed markets on average by 11% during Fed rate hike cycles, including three of the past four cycles. This scenario played out during the last Fed hike cycle between 2004 and 2006 – the Fed raised rates by 425 bps in less than two years, but it coincided with a strengthening US and global economy that supported a sustained rally in EM equities.
The debt profile of EM countries has also changed meaningfully in recent years. In 2000, the vast majority of debt issued by EM countries was in US dollars. Today, over two-thirds of all EM sovereign debt is in local currency. This typically reduces any potential instability and should make EM more resilient to rising rates. There will be greater headwinds for those countries and companies that have only been able to drive growth in recent years because of cheap, easy money in developed markets. In our view, companies with more sustainable long-term growth models can differentiate themselves in this environment.
Rising rates will highlight fragilities in EM and put pressure on companies with weaker governance practices who have attempted to take advantage of the lower rate environment in the US. However, if the cyclical recovery in earnings and return on equity that has materialized in 2016 can be supported by a better global growth backdrop, then there is reason to be constructive on EM equities going forward.
The 1980s Dollar Revival?
A further concern post-election has been the idea that we are once again in a bull market for the US dollar.
Many commentators have compared the prospects for the dollar to what was seen in the Reagan years of the 1980s, namely a multi-year, close to 100% rally. Goldman Sachs AM believes the US dollar has scope to further strengthen, but the magnitude may not mirror the 1980s because the starting points are very different. When Reagan came to power in 1981, the US was trying to pull itself out of recession, inflation had reached almost 15% and the dollar had fallen by roughly a third over the prior decade. More recently, the backdrop has been years of consistent dollar strength. In fact, following almost nine years of depreciation, EM currencies are trading at a discount of ~15% relative to fair value.
Furthermore, the primary driver of EM equity returns historically has been corporate fundamentals, not currency. In fact, over the past fifteen years, EM FX has been a slight detractor from total returns, but this has been comfortably offset by earnings growth. We see encouraging signs that EM earnings and returns on equity are picking up from cyclical lows and continue to believe that this can be the major driver of the asset class going forward, offsetting any potential currency headwinds.
Outlook and Opportunity: Stay the Course
EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar. The firm´s view is that these risks will not be as prevalent as initially feared.
Despite increased uncertainty, the key reasons for investing in EM, namely the diversification and alpha potential, are both still intact. In fact, they believe these benefits are potentially enhanced given that the market appears to be discounting the diverse, heterogeneous nature of the asset class.
Fundamentals are recovering
Fundamentals in EM are also far stronger than at the time of the 2013 Taper Tantrum when the asset class sold off following the Fed’s tapering of quantitative easing, although the market reaction has been similar.
The growth premium relative to developed markets has begun to reappear, external imbalances have been reduced, inflation remains benign and EM FX is more attractively valued than it was in 2013. Finally, we have seen the earnings and returns cycle turn positive in the past six months and earnings expectations continue to support a mid-teens earnings outlook for 2017. Historically this has been the key driver of EM outperformance.
On a forward price-to-earnings basis EM still trades at a 25% discount relative to developed markets. In absolute terms, EM appears to be returning to its long-term average, though we believe this is largely the result of significant earnings declines over the past few years, which have inflated the multiple. This is most apparent when observing a cyclically-adjusted price-to-earnings ratio, which shows EM is comfortably in the bottom quartile relative to its long-term history.
As such, while it is reasonable to argue that EM is not extremely cheap, the firm believes that long-term investors are able to access the market today at an attractive level for what could be cyclically suppressed earnings.
Selectivity is critical
EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar.
Their view is that these risks will not be as prevalent as initially feared. EM equity returns have historically been driven by corporate fundamentals rather than currency, suggesting the uptick that we have seen in earnings and ROEs suggests that there is significant growth potential for the asset class. In their view, an actively managed investment approach, focused on mitigating the structurally-impaired parts of the EM universe, is a potentially effective way to access this growth potential over the long-term.
Pixabay CC0 Public DomainPhoto: mainblick. M&G: We Have Arrived at a Pivotal and Potentially Critical Moment in Time
For the M&G Multi Asset team, 2016 was not so much about learning new lessons as being reminded of some of its key rules for investing: avoid getting caught up in short termism, do not waste time on forecasting, and beware lazy assumptions about what ‘should’ happen based on previous experience.
They consider Brexit and Trump have been surprises, but even if we could have predicted the results, subsequent price action went against the consensus view. Markets bounced back quickly from an initial ‘Brexit’ sell-off and the ‘risk-off’ volatility expected to be triggered by a Trump victory in the US presidential elections did not materialize.
The team feels this demonstrates the point that it is more important to focus on the facts we can know today about asset pricing and the fundamental economic backdrop, than attempting to predict how geopolitical events will be interpreted by the market. In their opinion, it also proved that no asset will be a ‘safe haven’ at all times, as mainstream bonds sold off strongly after the US election, from the historically low yields they had reached in the summer of 2016. This supports their view that the risk characteristics of asset classes are not static, rather value should be the starting point of assessing risk.
“We have arrived at a pivotal and potentially critical moment in time, where a material change in investor thinking and behavior is needed. The strategies that have been successful for the last decade are now likely to struggle”. They say.
So when looking ahead to next year and beyond, it is not about predicting what events will dominate headlines, but about being ready to respond to the changing mood of the market. The team adds: “The biggest risks investors will face next year are probably ones that we are not even aware of today, or that have faded from the headlines.”
The market appears to be pricing in a more favorable environment, with profits picking up globally and positive trends in data such as Purchasing Managers’ Indices and employment in certain areas. There is also a perception of inflation picking up and we have seen breakeven move a long way.
“While global equities in aggregate may not be as compellingly valued as at the start of the year, there are still very attractive opportunities at regional and sector level. We are still strongly favouring Europe and Asia (including Japan), as well as US banks. There are also plenty of interesting opportunities within non-mainstream government bond and credit areas of fixed income.” They conclude.
